A $150m hotel project that stress-tested the private credit boom

Private credit has surged as the major banks pull back from riskier loans, often associated with real estate lending. The boom has also propelled a wave of corporate-level deal-making, with Merricks, while retaining its brand, being taken over by Regal Partners last year.

But the rapid expansion in the sector is also putting the private credit model under pressure. The Australian Prudential Regulation Authority and the Australian Securities and Investments Commission have warned the sector warrants more scrutiny.

In recent weeks The Australian Financial Review has reported a number of cases where private credit players’ investments have been caught up in soured property projects or the lenders themselves have been forced to step in to take over developments.

Spelling out risks

Mr Redlich estimates Merricks’ funds have delivered roughly 10 per cent annualised returns with relatively low variability since the platform, backed by the ultra-wealthy Liberman family, was set up in 2007. Over that period, total returns from investment in the ASX were around 8 per cent, he said.

“We’re earning as good a return as equity markets and equity real estate and taking less risk,” Mr Redlich told the Financial Review.

“But – and this is a big ‘but’ – we are very clear to tell investors: you can’t earn 10 per cent return that is risk-less.

“The risk in private assets is more about liquidity and timing. It has a higher return profile but the trade-off is liquidity. Sometimes it takes longer to get your capital back.

“Melbourne Place is a good example of that. The borrower went into administration when the building was one level out of the ground.

“Fortunately, as the manager we are evolved enough that we have teams of people in the business that can step in and take over, deliver and finish a hotel.

“It’s easy to write a mortgage document, but you’ve got to have the ability to run the farm or to finish building a hotel or to manage any asset.”

The hotel project would have delivered around a 5 per cent return on its own merits but was held in within higher-returning, larger and diversified vehicles, which effectively spread the risk, according to Mr Redlich.

Merricks stepped in late in 2022, appointing administrators from McGrathNicol after the developer and owner of the Melbourne Place hotel development, Triple MMM Holdings, defaulted on payments to the builder and other service providers on the project.

At 130 Russell Street in the CBD, the 14-storey hotel opened in November last year and has been full this month as tennis fans flocked to Melbourne. Its builder was ADCO Construction.

Just the start

Designed by architects Kennedy Nolan, the hotel has 191 rooms and suites, along with a ground floor restaurant, a basement bar and a rooftop restaurant.

Its design gives a nod to Melbourne’s identity, using local bricks and pre-cast concrete and incorporating deep-red metal colouring and circular windows.

On the buy side is Ark Capital Partners, an investment platform that gives private and institutional investors access to hotel investments through direct ownership, joint ventures, and fund structures.

Ark Capital was backed by two other finance and investment firms – Lead Global, and Pioneer Wealth – and they now plan to establish a hotel fund off the back of the Melbourne Place transaction.